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the engine and wheel markets and is gaining
market share in hoods, trunks (boots) and
doors. Aluminium usage has increased every
year for nearly 40 years to reach 148 kg in
2009 and should hover around 156 kg in 2012.
Stricter fuel economy regulations should accelerate
the use of aluminium in bumpers,
heat shields, brake calipers, ABS and driveline
components, cylinder heads or bed plates.
However, the market challenge from alternatives
remains present: the steel industry
continues to invest millions of dollars to demonstrate
that high strength steels can be engineered
to provide the same weight savings as
aluminium; composites (like carbon fibre) also
represent a serious competitor in the automotive
and aerospace sectors. Although composites
have a cost and repair disadvantages, their
price is coming down while offering improved
corrosion properties and good aesthetics.
As for the other end-use markets, a number
of circumstances favour aluminium:
• the copper to aluminium substitution (as
the price differential reached record
highs) in overhead cables, heat sinks for
electronics, utility bus bars, battery cables,
wire harnesses and aluminium wiring in
air conditioners and white goods
• the wider use of aluminium in consumer
electronics for backing plates for flat
screen TVs (a lightweight alternative to
steel), tablet computers, mobile phones,
laptops or as a laminated film used in
exterior packaging for batteries
• the use of aluminium in green applications
such as solar panelling (used in the frame)
and wind farms (in submarine cables for
off-shore wind farm projects).
However, substitution can work both ways –
and aluminium remains under challenge in the
buildings sector where plastics have become
increasingly popular, in the aerospace sector
with inroads by composites and in the US
packaging industry where aluminium has lost
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market share in the individual drinks market
to plastic bottles.
Investor demand and market
fundamentals as price drivers
As for most commodities, the global aluminium
industry is characterised by a strong relationship
between the real price of the metal
and the gap between demand and supply of
the metal as captured by the variations in total
stocks (including both visible and unreported
inventories) expressed in weeks of shipments.
Prices tend to explode for very low levels of
inventories, while being quite stable despite
high level of inventories as prices cannot drop
below their average operating costs for a long
period of time. As mentioned earlier exchange
rates also play a role given that aluminium
prices are generally expressed in US dollars –
thus a weaker dollar drives up the US-dollar
price of aluminium.
However, since the middle of the past decade,
another aluminium price determinant has
been identified with the rise in popularity of
commodities as an asset class, with investors
using a variety of instruments and strategies to
gain exposure to commodity prices. The most
important investment vehicles used include:
• various Commodity Index Funds (CIFs),
where investments are made through the
purchase of commodity futures, which are
then rolled forward by being sold at or prior
to maturity and replaced with a new futures
purchase with a more distant maturity date as
long as they provide positive returns from rising
spot commodity prices
• Commodity Trading
Advisors (CTAs)
or momentum investors
where decisions to
buy or sell are based
on trends or technical
factors (mainly past
patterns of price behaviour)
• hedge funds where
investment decisions
are based on their
view of the economy
outlook or of the metals’
fundamentals
• proprietary trading
desks of major investment
banks or trading
firms that invest in
commodities on their
own account (note that
some of these major
banks and commodity
traders have their own warehouses and provide
incentives to metal holders to guarantee
that enough metal would sit in their warehouse
at full rent to cover the cost of the incentives
paid; these stocks are referred to as
‘stealth or unreported’ stocks since their importance
may only be estimated).
What is the impact of this investor demand
on spot aluminium prices?
The answer is not straightforward, even if
the rise in popularity of commodities’ investment
coincided with a surge in many commodity
prices. In general, spot prices (for immediate
delivery) are lower than future prices (in
the case of aluminium, official contracts exist
for 3-, 15, 27-, 63- and 123-months), and
the difference or ‘contango’ between the two
prices is high enough to at least cover finance
and warehousing costs.
The presence of such contango induces investors
to buy spot and sell futures, raising
the spot and reducing the futures prices until
the gain from the contango covers no more
than the costs mentioned above. Obviously,
near-zero interest rates and subsidised warehousing
costs increase the contango and thus
the expected return from such deals.
The same applies if the futures price moves
up because of higher investor demand: the
contango becomes wider, inducing more investors
to buy spot and sell forward, which
raises the spot price. In all other market circumstances
(insufficiently high contango or
spot prices higher than the futures price), the
mechanism linking spot and the futures price
is less clear as other variables such as expec-
Source: Derived from World Bureau of Metal Statistics (WBMS), various years
Fig. 3
22 ALUMINIUM · 11/2013